Judge approves HSBC deferred prosecution agreement—with a catch

A federal judge in July approved a $1.256 billion deferred prosecution agreement (DPA) with HSBC Bank USA and its parent HSBC Holdings that critics have railed against—but not without asserting his authority over it. Although Eastern District of New York Judge John Gleeson approved the DPA for violations of federal anti-money laundering and economic sanctions, he ordered the government to file quarterly reports with the court on HSBC’s compliance with the agreement.

Significantly, Gleeson also took a hard line against the contention of both the government and HSBC that he lacked any inherent authority over the approval or implementation of the DPA.

“What I can say with certainty is that by placing the DPA on the Court’s radar in the form of a pending criminal matter, the parties have submitted to far more judicial authority than they claim exists,” Gleeson wrote.

It is the same authority the court could exercise if a defendant in a federal criminal proceeding sought the court’s redress of a purported impropriety in the proceeding, he said. He acknowledged that exercising such supervisory power in the context of a DPA is “novel,” and indeed, his opinion appears to be the first time a judge has established that courts hold such power.

Settlement Scrutiny

“There is now a well-reasoned opinion by a very well-respected judge that has introduced the possibility that agreements may be subject to more scrutiny,” says David Frankel, a partner at Kramer Levin Naftalis & Frankel. “A well-meant, serious DPA ought to pass muster with another judge just like this one did with Judge Gleeson, but this adds another element to be cognizant of.”

The Department of Justice (DOJ) announced the agreement with HSBC and submitted it for the court’s approval in December 2012, at which time Gleeson asked both the DOJ and HSBC to present arguments in support of the agreement.

The question of a court’s supervisory authority over DPAs arose after the government and HSBC both argued that the court’s authority does not extend to scrutinizing the substance of the DPA. Instead, they argued that judicial authority is limited to deciding whether to grant a waiver to the Speedy Trial Act so that the parties can enter into the agreement. In his July opinion Gleeson, invoking Supreme Court precedent, said the assumption was erroneous.

Gleeson isn’t the first federal judge to apply scrutiny in approving a DPA. Earlier this year, U.S. District Judge Terrence Boyle of the Eastern District of North Carolina approved a DPA in a Medicare fraud case and said his review of the settlement included “weighing the seriousness of the defendant’s offense against the potential harm to innocent parties that could result should this prosecution go forward.”

And on a parallel track, numerous federal judges now have questioned Securities and Exchange Commission (SEC) civil settlements, first and most notably Southern District of New York Judge Jed Rakoff, who in 2011 refused to approve a $285 million settlement in a highly visible case dealing with Citigroup’s practices surrounding mortgage-backed securities.

The message coming from these courts is that their purpose is not merely to rubber-stamp settlements.

“No GC likes to imagine that his or her client will need to consider these issues, but the fact of the matter is that many of them will have to over the next several years. And in negotiating a resolution, they ought to consider not only how this resolution will appear to the board and to the corporation’s stakeholders but also how it will appear to a court,” says James Brochin, a partner at Paul, Weiss, Rifkind, Wharton & Garrison.

Public Criticism

As part of the DPA, HSBC admitted that from 2006 to 2010 it laundered at least $881 million in drug- trafficking proceeds from Mexican and Colombian cartels as a result of willful, knowing and systemic failures of oversight and due diligence, in violation of federal anti-money laundering regulations.

It also admitted to processing and enabling approximately $660 million in transactions between 2000 and 2006 with customers in Burma, Iran, Sudan, Cuba and Libya, which were subject to sanctions by the Office of Foreign Assets Control (OFAC).

The government’s decision not to indict the company for such misconduct (along with the lack of prosecutions of individuals at HSBC) has been the subject of loud and frequent criticism.

In a letter to U.S. Attorney General Eric Holder, for instance, Sen. Chuck Grassley—one of several lawmakers to criticize the settlement—castigated the DOJ’s “inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists.”

Absolute Discretion

Gleeson’s opinion acknowledged “heavy public criticism” of the agreement and cited some of the more high-profile critiques, including the New York Times editorial that declared “a dark day for the rule of law” and Matt Taibbi’s Rolling Stone story “Gangster Bankers: Too Big to Jail.” However, he said, the government has significant discretion in prosecutorial decisions and absolute discretion to decide whether to prosecute, even in the case of a formal nonprosecution agreement.

“[E]ven if I were to reject the DPA, I would have no power to compel the government to prosecute the pending charges against HSBC to adjudication,” Gleeson said.

In the end, Gleeson approved the DPA “without hesitation,” noting that, in light of the fact that corporate entities can’t be imprisoned, the agreement “accomplishes a great deal” in imposing upon HSBC “significant, and in some respect extraordinary, measures” that fulfill “much of what might have been accomplished by a criminal conviction.”

Brochin says the decision is actually quite supportive of the Justice Department’s position. “At the end of the day, Judge Gleeson ultimately approved the agreement for essentially the same reasons the Justice Department gave for why this is an important and beneficial arrangement,” he says.